Pricing
The Origins of Pricing
• Chances are, you have already heard of the word “SRP”.
Short for “Suggested Retail Price.” It signifies the price
that a consumer product is supposed to be offered at over
the counter and in supermarkets.
• But once upon a time, there was no such thing as a
suggested retail price. Prices are always the subject of
negotiation.
• In reality, you would still see this pricing attitude
whenever you go to tiangge or market stalls or palengke
(wet markets). In these places, the consumers are
actually supposed to haggle or make tawad with the
vendors. In most cases, vendors can also show
resentment for buyers who do not bother to haggle!
• However, the above condition is borne out by the time-
honored “dance” between the buyer and the seller. It is a
socio-cultural norm that all parties are expected to
respect and abide by. Because the seller knows that the
buyer is going to ask for a discount (tawad), a generous
level of price paddling is taken into consideration. The
buyer is expected to understand that the seller does and
therefore entitled to ask for a “tawad.” This is the reason
why merchandisers can go as far a to look at non-
haggling shoppers with contempt. What is the moral of
the story? Haggle whenever you can!
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How is Pricing
Defined?
Pricing is a process of determining the value that is received
by an organization in exchange of its products or services. It is
a crucial element of generating revenue for an organization.
The pricing decisions of an organization have a direct impact
on its success. The price of a product is influenced by several
factors such as manufacturing cost, competition, market
conditions, and quality of the product.
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Pricing
Objectives
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What are Your Pricing Objectives?
• Before pricing a product, an organization must determine its pricing
objectives. In other words, what does the company want to accomplish
with its pricing? Companies must also estimate demand for the product or
service, determine the costs, and analyze all factors (e.g., competition,
regulations, and economy) affecting price decisions. Then, to convey a
consistent image, the organization should choose the most appropriate
pricing strategy and determine policies and conditions regarding price
adjustments.
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A. Profit – Oriented
Objectives
Profit oriented pricing focuses on product and business
finance. The profit of a business is the money left behind
after all costs have been covered. The price per product is
set higher than the overall cost of making and selling the
product ensuring that the business makes a profit from each
sale. The company is guaranteed a profit on every sale.
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a. The Target Return Objective
• The Return of Investment or ROI is the amount of
profit that the company aims to make on the basis
of the amount of assets or resources it h as tied
up in the product.
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b. The Profit Maximization Objective
• Implies that prices are set in such a way that they help in
achieving maximum profit. According to Stanton, Etzel
and Walker, “The pricing objective of making as much
money as possible is probably followed more than any
other goal.” Profit maximization is more beneficial in the
long run as compared to short run.
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B. Sales-Oriented
Objectives
Sales- oriented pricing objectives refer to
those that will provide higher sales volume.
This maybe achieve through any of the
following:
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1. Increasing sales volume
• Implies sales expansion by giving discounts to customers.
In the short run, an organization might be ready to bear
losses by reducing the prices to increase the sales
volume. For instance, the hotel industry faces low demand
during off–season; prefers to decrease its prices and offers
discounts to increase sales.
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2. Maintaining or increasing market
share
• Plays a crucial role in the success of an
organization. The organization tries to gain
market share by lowering down the prices as
compared to its competitors.
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C. Status quo-
oriented objectives
Status quo-pricing requires maintaining the same prices
for the company’s products. This happens when the firm
is satisfied with its current market share and profits.
Status quo pricing maybe due to (a) to stabilize prices;
(b) to meet competition; and (c) to avoid competition.
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The Pricing Procedure
• The pricing procedure refers to the series of steps adapted in the determination
of price. The series of steps are the following:
a) The determination of the realistic range of choice
b) The selection of pricing strategy
c) The evaluation of economic feasibility
d) The setting of the price
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1. Determining Realistic Range of
Choice
• The first step in pricing is the
determination of the realistic range of
prices by which a final choice shall be
made.
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2. Selecting a Pricing Strategy
• The decision-maker may adapt market
skimming strategy or penetration
strategy in selecting appropriate pricing
strategy
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2. Selecting a Pricing Strategy
a. Market skimming Strategy
It requires the setting of price at the upper limit of the realistic
range of choice.
b. Penetration Strategy
Setting the price at the bottom of the realistic price range. The
purpose is to penetrate the market as fast as they could.
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Pricing Approaches
Good pricing usually starts with customers and their perceptions of value.
Eventually, the customer will decide whether a product is worth its price or
not. Therefore, we start with customer value. When customer buys a
product, they exchange something of value (the price) to get something of
value (the benefits of having or using a particular product). Therefore, it is
crucial to understand how much value consumers place on the benefits they
receive from the product and setting a price that captures exactly this
value.
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Pricing Approaches
Prices of products and services maybe set based
on any of the various pricing approaches as (a)
Cost-Based Approach; (b) Buyer Based Approach;
and (c) Competition Based Approach.
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A. Cost-Based Approach
Cost-based pricing is a very simple approach. A company figures
out how much it costs to make a product or deliver a service and
then sets the price by adding a profit to the cost. For example, if it
costs a small toy manufacturer 10.00 to make its signature stuffed
animal (taking into account fixed and variable costs) and the
company wants a 20 percent profit per unit, the price to the retailer
will be 12.00.
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• a. Cost Plus Pricing. It calls
for adding a percentage of
cost on top of the total cost.
The added percentage
constitutes the profit margin,
Types of Cost- while total costs represents
the direct costs and the
Based Pricing overhead costs.
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Types of Cost-
Based Pricing
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• b. Target Rate of
return Pricing. It
enables a company to
establish the level of
Types of Cost- profits that it feels will
Based Pricing yield a satisfactory
return.
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Types of Cost-
Based Pricing
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B. Buyer-Based Approach
• It deals with consumer perceptions or behavior as bases in determining the selling
price of a product or service. This method is composed of the following methods:
1. Perceived Value Pricing
2. Price-Quality Relationship Pricing
3. Loss-leader Pricing
4. Odd-Numbered Pricing
5. Price Lining Pricing
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• This method establishes
the price for a product
based on the buyer’s
perception. The value of
1. Perceived the product to the
Value Pricing market becomes the
basis for the price.
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• Also known as prestige pricing
strategy. It is based on the
premise that consumers will feel
that products below a particular
2. Price- price will have inferior quality.
This approach hinges on the
Quality observation that consumers
Relationship associate high price with high
quality and low price with low
Pricing quality.
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• It refers to the practice of
setting low prices on
selected products which will
result I n the generation of
less profits, but with the
3. Loss-Leader objective of increasing the
Pricing sales volume of other
products sold by the
company.
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• Also known as “nine and zero
effect”. This refers to the
practice of setting price even
below peso mounts. Prices that
end in a nonrounded odd
4. Odd- number give the consumers the
Numbered perception that the prices are
not expensive. It is seen to be
Pricing. “friendlier” or more palatable
than even numbers.
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• This method refers to the
practice of selling merchandise
at a limited number of
predetermined price levels. The
different price levels are
intended to represent various
5. Price-Lining levels of quality. The buyer is
Pricing then provided with various
buying options increasing his
chance of making a purchase.
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C. Competition-Based Approach
• The competition-based pricing approach refers to
the setting of prices based on what prices are
being charged by competitors. There are two
kinds of pricing under this approach namely (1)
going-rate pricing and (2) sealed bid-pricing.
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• Under this method, the
firm adapts a price based
on the competitor’s price.
It is proactive because it
uses price as a
1. Going-Rate communication tool to
Pricing inform the market about
the value of the product.
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• The firm sets its price to
be a little lower the
competitor’s. Less
attention is also given to
2. Sealed-Bid the firm’s costs and
Price demand.
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